Tweeter Narrows Losses Despite Tough TV Transition

12/06/2006 03:14:00 PM Eastern

By: by Alan Wolf

Canton, Mass. — A slowdown in its projection TV business and sharp declines in flat-panel price points impacted sales and earnings for the fourth quarter and full year at Tweeter Home Entertainment Group.

Tweeter narrowed its net loss by 11.4 percent to $16.4 million for the period vs. last year’s results, which included a one-time charge of $3.1 million. Gross profit dollars declined for the quarter, but gross profit margin percentage improved 170 basis points to 40.1 percent, and expenses (sales, general and administrative) declined by $7.7 million, the company said.

For the full fiscal year, ended Sept. 30, total revenue from continuing operations slipped 2 percent to $775 million and same-store sales edged up 1 percent. Operating losses of $13.7 million were reduced by 71 percent compared to the prior year, which included a non-recurring charge of $16.5 million.

“Although we are encouraged with our fiscal improvement on a year-over-year basis, our turnaround is ongoing,” said president/CEO Joe McGuire. Hindering the effort was a year-long decline in Tweeter’s projection TV business that was exacerbated by plummeting flat panel prices. Projection TV revenue was down 16 percent for the 12 months, and while flat-panel volume rose 32 percent in dollars and 51 percent in units, revenue for Tweeter’s total TV business increased only 8 percent, he said.

McGuire said he is pleased with the company’s balance sheet management, noting that $20 million was invested in capital expenditures during the fiscal year while debt was reduced by $17 million.

In a conference call, McGuire said sales were driven by TVs and custom home installation. The latter represented 6.4 percent of total annual revenue, up from 5.1 percent the prior year, and comprised 7.2 percent of fourth quarter revenue, up from 5.9 percent last year.

McGuire said Tweeter’s next-generation prototype stores were performing well, showing marked improvement in gross margin rate and dollars over legacy stores. Indeed, the first prototype, which opened nearly two years ago in Las Vegas, is the No. 1 location in gross margin chain-wide, he said. A second Las Vegas prototype is set to open this month in Henderson, Nev., bringing the total of pilot stores to seven by month’s end.

McGuire said management has targeted between 20 and 30 underperforming stores for closure or conversion to the new retail model, and is awaiting final analysis of prototype store operating issues, to be completed within the next six months, before taking any action.

He said Tweeter is addressing industry-wide margin declines in advanced TVs — and lower attachment rates on lower-priced TVs — by driving “a more complete sale” that also emphasizes audio and home control and automation. In addition, Tweeter is overhauling its marketing message under new senior VP Patrick Reynolds, and has begun direct-sourcing in-house cables and in-wall speakers. McGuire said the company could conceivably grow its private-label business, which now stands at 2 percent of sales, to upwards of 10 percent of total revenue.

Asked about the threat to Tweeter’s custom install business by the big-box chains, he noted that Best Buy’s Magnolia and Circuit City’s firedog initiatives are inherently limited due to the high capital commitment required for ongoing education and training, leaving the more complex installations for well-heeled and better-educated consumers to A/V specialists.

“The idea that you can just go home and plug in your TV is going away,” McGuire said. “The interoperability of devices is pretty complex, and Best Buy and Circuit City had no choice but to add services. It’s becoming more of a requirement than a luxury, but the big education load is ongoing and won’t be changing any time soon.”